Memphis' $2.4 billion municipal pension fund took a blow in the 2008 Wall Street crash and is still trying to recover.On Friday, a consultant advised against investing in local startup firms.

Over the past four years, Memphis City Hall has diverted nearly $200 million worth of local tax revenue into the strained municipal pension fund.

Now the $2.4 billion pension fund, coming off a favorable round of investments in 2018, is being asked to pony up $10 million for investing in the Epicenter Fund, a new pool of local money being set up to help bankroll Memphis entrepreneurs.

On Friday, a pension consultant recommended the city pension agency walk away from Epicenter’s money request.

Memphis financial executive David Waddell, chairman of Epicenter’s board of directors, said the nonprofit may land Strickland’s support despite the consultant’s advice.

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David Waddell serves as Chairman of Epicenter Memphis, a nonprofit agency in Midtown that recently landed commitments for $40 million to establish a venture capital fund.(Photo: Ariel Cobbert, The Commercial Appeal)

Epicenter aims to aid 1,000 area entrepreneurs by 2024. The independent nonprofit, located in Midtown, was formed in 2014 as a Greater Memphis Chamber moon mission that aimed to spur a sluggish local economy.

“Memphis has got to decide. If it is going to grow it has to be willing to invest in itself,” Waddell said Tuesday. “This takes leadership. This can’t be done bureaucratically. No pension consultant is going to stand up and say it’s the right thing to do for the city, even if it is the right thing to do if we want to grow.’’

Worried retirees

Last month, The Commercial Appeal reported that Epicenter chief executive Leslie Lynn Smith had asked Strickland and Shelby County Mayor Lee Harris to open the way for city and county pension fund investments totaling about $20 million in the Epicenter Fund.

Strickland could use the consultant’s recommendation as a handy reason to refuse the request and in turn satisfy worried retirees. Among city government’s 5,200 retirees, tension climbed last month after word of Epicenter’s request spread.

“Retirees went nuts. My phone rang for three days,” said Thomas Malone, International Association of Fire Fighters Local 1784 president.

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Memphis Fire Fighters Association president Thomas Malone held an emotional press conference announcing that the association will donate $1000 to the crime stopper fund to find the assailants in the murder of two-year-old Laylah Washington. (Photo: Mark Weber/The Commercial Appeal)

Still unsettled by the pension fund reforms set off by the Wall Street meltdown a decade ago, city government retirees insisted pension money only go into the safest investments.

“The city had expressed so much concern about the health of the pension fund” less than five years ago, said Mike Williams, Memphis Police Association president. “And now they’re thinking about going in a new direction which the pension fund was not designed for. Using our pension money for tapping into high-risk ventures opens the door to possible future endeavors where local entities within the city can use the pension money.”

Epicenter officials figured Memphis pension money already finds its way into venture capital funds run by money managers investing in high-risk enterprises in other cities. So why not contribute venture capital to local entrepreneurs?

Both mayors referred Epicenter’s requests to their separate pension advisers. While the county has not yet received a report, the city’s pension consultant, Segal Marco, sent a letter Friday that says Epicenter falls short of city pension rules that require experienced money managers with capable staffs, and a profitable record of investing.

“Our preliminary assessment is that the Epicenter Fund does not meet either of the guidelines listed above and does not meet the fiduciary standards of care needed for a pension fund investment,” Rosemary Guillette, Segal Marco vice president, says in a letter to the city obtained by The Commercial Appeal.

“We commend the work that Epicenter is trying to accomplish especially in its vision of creating a just and inclusive economy through the promotion of entrepreneurship and innovation,” the letter says, but adds, “Pension Fund assets are not the same as other kinds of assets. There are strict guidelines around the type of investments that can be used in a pension fund and the fiduciary standards that need to be meet for these investments.’’

$100 million venture fund

Shirley Ford was appointed the new chief financial officer of Memphis on Jan. 4, 2018.(Photo: Courtesy Lemichael DaShaun Wilson)

In Shelby County, Harris’ office did not comment Tuesday. Harris earlier said he supported the idea of investing county pension money in the Epicenter Fund.

Shirley Ford, who heads the Memphis Pension Investment Committee and serves as city government’s chief financial officer, could not be reached for comment Tuesday. In an interview last week about the pension fund’s performance in 2018, Ford declined to comment about Epicenter's request.

"While we're disappointed, we respect the early feedback from the City's consultant and will continue to work to find ways to achieve an investment in this critically important capital tool for Memphis entrepreneurs,'' Epicenter head Smith said in an email Tuesday.

Waddell, the Epicenter chairman, contends the Epicenter Fund can help power the local economy and still satisfy the pension fund’s rules for experienced managers. He would oversee the fund along with local financial executives and technology expert Jan Bouten, who heads BioWorks Foundation of Memphis’ Innova Fund. Innova invests venture capital in tech firms. Venture capital goes into promising startups still too green to get bank loans.

By last fall, FedEx had contributed $10 million to the Epicenter Fund and local investors had committed another $30 million. Epicenter’s Smith intends to portray the local effort as a sign Memphians believe in the city’s economic potential. She said that sign can help win favor when she asks large venture capital funds in San Francisco to put money in the Epicenter Fund. Epicenter plans call for raising $100 million for loans and investments, making it the largest such fund in the Southeast.

Well-off Memphians

But union leaders insist well-off Memphians ought to rely entirely on their money rather than dip into the pension fund.

“This group wants to spend $10 million on risky investments at a time when 80 percent of new businesses fail,” Malone said. “Anytime you invest in anything there is a risk but this appears to have a tremendous risk.’’

Although Epicenter reportedly has a standing offer from an undisclosed Memphian to make up any losses of pension money put in the Epicenter Fund, the police union’s Williams argues the rich Memphian ought to just put that money in the venture capital fund

Mike Williams (left) and Mayor Jim Strickland

“If it’s so good why doesn’t that entity just put the money in up front and reap the benefits?” Williams said.

Waddell, the Epicenter chairman, said Epicenter’s goal is not to rebuild the city pension fund although that could happen. The Wall Street collapse in 2008 drained nearly a third of the pension fund’s value.

Since 2014, the city has been trying to fill the remaining hole in the pension fund. Last year, about $55 million in local tax revenue was diverted into the pension fund.

What could fill the hole in the pension fund quickly? If one of the entrepreneurs relying on the Epicenter Fund strikes it rich and repays the venture capital fund far more than it put in.

With the wealthy Memphian’s guarantee the pension fund will not lose, “the downside is you lose nothing,” Waddell said. “The upside is you get a new FedEx.”